David Strange, a member of Property 118, recently wrote to Mark Carney, Governor of the Bank of England, about the Government’s plans to restrict finance cost relief for individual landlords. The exchange between Mr Strange and Mr Carney reveals that the Bank of England Governor acknowledges that the recently announced changes to landlord taxation have the potential to affect activity in the buy-to-let sector materially.

“Dear Mr Carney

I would like to think of myself as a cautious and prudent individual with a career of over seventeen years advising on financial planning, investment and taxation. Whilst not all private landlords will have that background many, if not most, or perhaps even the greatest majority would seek to deploy their capital in an effective way to secure a reasonable running yield, the maintenance and enhancement of the housing stock and quality and assured accommodation for their tenants.

You have apparently identified the BTL sector as a risk to financial stability, I believe this is misplaced on several counts.

1) private landlords, even those incorporated and with ten’s of thousands of units, are not charities and look to profit on their investment of both capital and time, as with any walk of life there will be some who behave recklessly just as with some central bankers.

2) Those with debt may have historically sought to tune their gearing to provide a modest positive cashflow but today the “best” rates offered of around 3.5% already encourage an LTV of 75% and with lender stress testing up to nearly 6% on a 125% of rental coverage. I personally stress test on up to 8% allowing for all actual costs, contingencies, and voids.

a. On this basis the BTL sector is of far less a threat to stability than the owner-occupier currently paying far lower rates and on higher LTVs and thus at greater risk from rate increases given the constraint on domestic budgets.

3) There is in fact no “BTL” sector as it is highly fragmented both as to participants and the housing need they address.

a. The instability introduced by the recent actions by the Chancellor and the BoE are a direct threat to the continued housing of some of the UK’s most vulnerable citizens, Housing Benefit claimants, the long term unemployed, former prisoners or those with other life challenges leaving them unsuitable as mortgage borrowers. This threat emanates from the Chancellor’s injudicious taxation of turnover under Clause 24 which will cause a reduction in supply as some to exit entirely or migrate their business away from rent constrained tenants and the deterrence of new entrants as a result of the raised cost of entry.

b. I do not have such tenants but provide solely for the mobile professional and senior and international student; all still equally unsuitable as prospective purchasers. Although not uniquely, such people are often government or corporate funded and thus with a high degree of financial security. If the PRS for such a market diminishes the UK will lose valuable foreign exchange in addition to the substantial expenditures made on educational services, corporate presences, and the local service industries.

4) The notion that my actions are “denying home owners” is misplaced.

a. My objective is to secure well located units at an un-elevated price and disengage whenever faced with an HO on a prospective purchase as it is they who will bid the price up of both the specific property, and importantly agent expectations, which is the very last thing that prudent landlords would want to do.

b. I have walked away from even existing let properties where the financials do not work leaving such units to become available to prospective HOs toward the end of the tenancy.

c. It is incorrect to talk of HOs being “outgunned” as I already have to inject more capital and pay higher interest rates than HOs.

I could make many more points but for clarity at this point let them rest.

The actions of the Chancellor and the BoE appear to speak more to the gallery of public misperception and the undoubted but unvoiced need to balance the budget in the former and in the latter the misunderstandings in Europe of the British lending sector which has long been the case.

Neither the Chancellor nor the Financial Secretary to the Treasury has given coherent reasons for, nor the true implications of, either recent measure affecting the PRS. At best sic. we have a disingenuous reference to the correct taxation of those with the highest incomes (perhaps appropriate in respect of pension contribution tax relief) when many landords have only a moderate income when taking account of a normal business cost and the many whose lives have had an unexpected instability introduced by suddenly finding themselves significant higher and additional rate tax payers with all the secondary consequences that flow.

As for the BoE I have seen little evidence for the contentions made as to the potential impact of the sector on the stability of the country nor of the propsed and actual constraints, I would welcome the publication of such evidence and analysis.

Yours faithfully

David Strange”

Mr Carney replied as follows:

Mark Carney, Govenor of the Bank of England

“Dear Mr Strange,

Thank you very much for taking the time to contact me. While decisions on tax fall to the Government, as you note in your email the Bank of England has been monitoring the buy-to-let mortgage market closely. Your description of some of the more salient aspects of the market is welcome, and a valuable contribution to our analysis of the market and the risks it poses to financial stability. This is particularly the case in the context of recently announced changes to taxation arrangements.

The Bank’s remit in this area – through the Financial Policy Committee – is to guard against risks to financial stability. That means our aim with regard to buy to let lending – and other forms of credit – is to ensure that growth is sustainable. In particular, we are conscious of the risk that a build-up of highly indebted buy-to-let landlords could make the housing market – and wider economy – more volatile if those borrowers are forced to sell as prices are falling. To guard against this, we are focussed on the trends around the quantity and type of lending, but also the underwriting standards of lenders, rather than simply on the growth of buy-to-let per se. While to date we have not seen evidence of widespread deterioration in underwriting standards – and in fact, as you observe, some lenders have actually tightened their lending standards – it is important that the quality of lending is kept under review.

As discussed in the most recent Financial Stability Report, the Bank and the Financial Policy Committee are conscious of the growth in buy to let lending in the UK. However, we are also aware that this growth since the financial crisis must be seen in the context of the sharp fall in lending during the crisis, and the ongoing structural shift towards a larger private rental sector. Like you, we view the recently announced changes to taxation as having the potential to affect activity in the buy-to-let sector materially. Our monitoring of buy to let activity will look to identify changes of the sort you describe, and we will share our intelligence with HM Treasury as appropriate.

I can assure you that the Bank will continue to act proportionately in respect of this market and is aided in doing so by contributions like yours.

With best wishes,

Mark Carney”

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Well, he's still reeling out the bizarre notion that we'll all rush to sell if prices start to fall (am I the only one to think that's the LAST thing we'd do?), but his final paragraph sounds hopeful, and the whole tone seems to indicate that an interesting new perspective on the whole sector has been brought to his attention.

True, but to suddenly call in tens of millions of lending wold immediately see their own balance sheet imapired. In my, solely third hand, experience lenders are reluctant to call in lending unless either i) the debt was no longer being serviced or the bank had serious cause to consider some material breach was imminent or ii) the lander itself was suddenly finding itself in breach of solvency conditions and had to engage in a fire sale.

Even in the US in the depths of the recession repos. were slow and the government, and at least as importantly expectant purchasers waiting for a bargain, lenders subsequently dri fed properies on to the market to get the best possible price.

So the lenders would have spare cash looking for a home. That would mean they were committed to servicing the deposits they had, and would be offering deals to FTBs thus pushing house prices up, yet again a stabilising influence. HPC members 'pawing' and quoting this site, seem so adamant house prices are going to fall dramatically. As Nick Pope showed long term this ain't gonna happen any century soon.

"A simple calculation of the increase in house prices is interesting and I can only speak for the Reading area from personal knowledge.

From 1935 to date the average house price has risen at approx. 9.4% annually. Compounded annually and forgetting all costs expenses, repairs and modernisations this equates to a total return on original investment of 174,400%.

Bringing it a bit more up date the figures for 1972 and today are 9.2% and 6675%.

This takes no account of periods when prices were stagnant (1st and 2nd World Wars in particular) and the changing dynamic of property ownership. The vast majority of houses were rented before the 2nd World War, there were rent controls in the 1950’s onwards thanks to the notorious Rackman and Governments generally have messed with the market in the spurious belief that it can be changed – it will spring right back to its natural level controlled by supply and demand as soon as regulation is relaxed."

Part of the problem today (for depositors) is that deposit takers have minimal, if any, interest in them, allmost literrally. From the deposit takers perspective a deposit is a liability and an unreliabale and expensive one at that, far better to raise money in the wholesale markets where quantum and flow are more assured and durations can be better matched, remember the problems of lending long when backed by short term money.

The anarchists still seem to have convinced themselves prices are going to crash.

As there is any increase in BTL sales, more folk will see a buying opportunity, more need for housing from the evictions, same or probably more pressure on rent.

Same number of people to be housed in a reducing stock so they may have a very long wait, minor corrections not withstanding. Deluded fules.

Those fully leveraged will sell some properties, but with 20% of the housing market being PRS, many being long time investors, only a proportion highly leveraged, others re-arranging method of holding, many more going up market, to recoup income, a few being snapped up by the bigger portfolios, I actually see more upward pressures.

Especially for providers of emergency accomodation at great cost to the public purse.

What does not seem to be answered is why, if BTL LTV was at risk of getting over stretched, (Carney) the lenders were not instructed to reduce it 60%, 40%, 20% as required, in good time. Incompetence imv.

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